What is NBFC- micro finance institution?
The need for finance is an attribute of every section of society. It is underserved as the Banks simply reject the loan proposals of the persons who lack any assets or an assured source of income. To remedy this, microfinancing has emerged as a category of financial services targeting individuals and small businesses which lack access to the conventional resources of financing. As its name suggests, the loan amount is small but it creates a significant impact.
The concept of microfinance gained the spotlight when the Nobel Peace Prize 2006 was awarded to Prof Muhammad Yunus and Grameen Bank for their work which created a huge impact on the socio-economic scenario in Bangladesh.
Potential for expansion
Microfinancing has a huge market in the unexplored and underbanked areas of India. While this is a crucial tool of creating social change, many first-generation entrepreneurs are running successful micro-finance operations. One may look at the example of Bandhan Bank Limited whose Micro-finance background helped it win a Universal Banking License in the year 2015.
As enumerated by Shri M. Rajeshwar Rao, Deputy Governor, Reserve Bank of India, NBFC-MFIs have lent about 30% in the overall gross loan portfolio of around ₹2.14 lakh crore in the sector as on June 30, 2021. He has expressed that ‘Micro finance has come of age in India. It has developed into an important financial delivery mechanism. It has particularly helped women to become owners of assets, have an increased say in decision making and lead dignified lives. In current landscape, it is possible to expedite financial inclusion process by leveraging the flexibility provided by the multiple tech-led models for delivering a wide range of financial services.’
Legal framework
In India, NBFC- MFIs are governed by the Reserve Bank of India, like other NBFCs. The Master Direction issued by RBI defines NBFC- Microfinancing Institution (NBFC-MFI) as follows-
NBFC-MFI means a non-deposit taking NBFC (other than a company formed and registered under section 25 of the Companies Act, 1956) that fulfils the following conditions:
- Minimum Net Owned Funds of INR 5 crores. (For NBFC-MFIs registered in the Northeastern Region of the country, the minimum NOF requirement is INR 2 crores) (click here for explanation of ‘net owned funds’)
- Not less than 85% of its net assets (total assets other than cash and bank balances and money market instruments) are in the nature of “qualifying assets.”
The term “qualifying assets” is defined using the criteria (as simplified in the table below). These criteria also explain the essential characteristics of NBFC-MFIs.
| Sr. No. | Particular | Details |
| 1 | Eligibility of borrower | Income not exceeding –
INR 1,25,000 – in rural area INR 2,00,000 – in urban or semi urban area Borrowing from not more than 1 other NBFC-MFI |
| 2 | Loan amount | INR 75,000 – in first cycle
INR 1,25,000 – in the subsequent cycles |
| 3 | Maximum indebtedness of the borrower | INR 1,25,000 (excluding medical and educational indebtedness) |
| 4 | Minimum tenure of the loan | 24 months (for a loan of more than INR 30,000), without any penalty for prepayment |
| 5 | Nature of loans | Not less than 50% of the loans shall be for income-generating activities |
| 6 | Nature of instalment | Weekly, fortnightly, monthly on the choice of borrowers |
Important obligations of NBFC-MFIs
NBFC-MFIs are treated as a special category and are regulated more strictly because of their socially significant role. Some of the key obligations are as follows:
Capital Adequacy–
NBFC-MFIs shall maintain a capital adequacy ratio consisting of Tier I and Tier II Capital which shall not be less than 15 per cent of its aggregate risk-weighted assets on-balance sheet and of the risk-adjusted value of off-balance sheet items.
The total of Tier II Capital shall not exceed 100 per cent of Tier I Capital.
Interest rate –
The maximum net interest margin which can be charged by the NBFC-MFIs is 12%. Further, the interest rate cannot exceed 2.75 times the average base rate of the five largest commercial banks by the asset size.
Processing charges –
Processing charges shall not be more than 1% of the gross loan amount.
More stringent fair practices code-
All types of NBFCs with customer interface are required to have fair practices code. However, for the NBFC-MFIs, conditions stipulated by RBI are stricter which include maintaining transparency in the interest rates, having standard form loan agreement, not charging penalty on delayed payment, and not taking security deposits.
Additionally, there are restrictions regarding multiple lending, overborrowing and ghost borrowing.
Understanding the practical side of NBFC-MFIs
The registration process of NBFC-MFIs is similar to other NBFCs which may be referred here.
We typically advise the Clients to thoroughly assess their business plans. After that, we run multiple scenarios by them to check if they really want to go for NBFC-MFI type of registration. This ensures that post-registration, the business can proceed as planned.
For those who are targeting the base served by NBFC-MFIs, registration has to be obtained only under this type. The other types of NBFCs can lend to micro finance sector only up to 10% of its total assets. In such cases, with the usual due diligence, the registration can proceed.
- Team Efficax